Related

This article was published April 16, 2007. It is the seventh in an 11-part series exploring what's involved in managing a revenue property. We follow the process from purchase to selling with all the rewards, pitfalls and challenges of being a landlord.

After getting burned one too many times in the stock market, Salvatore Orfeo decided bricks and mortar was the way to go.

Since 2003, he and a partner have bought three small revenue properties in various Montreal neighbourhoods.

Taking a contrarian approach, they picked up buildings with rents below market rates. They then persuaded tenants to sign on to generous rent increases in return for renovations.

"Everyone asks how we do it," Orfeo said of securing the rent hikes. "I say you just have to ask. We are polite. It's a negotiation. We never force anyone to leave."

Among the provinces that regulate rents, Quebec is one of the least generous when it comes to letting landlords recoup investment in major work. That's why owners like Orfeo have to be creative when it comes to getting a return on their renovation dollars.

Orfeo, 34, is a real estate agent, which helps him get a jump on scouting out revenue properties. His holdings include a five-plex in east-end Mercier-

Tetraultville and a six-plex in the Hochelaga-Maisonneuve district. Last week, he and his partner, who preferred not to be named, bought a nine-unit building in Montreal North.

The most recent purchase was typical of Orfeo's strategy.

"They were rented unusually low," he said of the Montreal North building, which had many long-time tenants and apartments going for $400 to $450.

"The former owner had let it go. The building was paid off, so he didn't bother to improve it," Orfeo said. "We asked everybody if, in exchange for renovations, they would cooperate to raise the rents. They agreed."

Orfeo and his partner will use the rent increases to fund renovations. In the short term, they will change countertops, add ceramic tiles to kitchens and bathrooms and sand hardwood floors. Longer-term work will include replacing windows and balcony railings.

The renovations and higher rental income will boost the building's worth from the lender's point of view, letting Orfeo use it as collateral for a future purchase.

"We want to be able to do it full-time - when we have enough properties," Orfeo said of his goal of eventually living off rental income.

While tenant lobby groups usually applaud rent controls, owners are often left wondering how they can recover improvement costs. Not all revenue property owners are as lucky as Orfeo when it comes to raising rents after carrying out major work. They are often hemmed in by a tenant's right to complain to Quebec's Regie du logement, which settles disagreements according to its guidelines.

For 2007, Regie guidelines provide for a 4.2-per-cent rent increase for major work. That comes out to $3.50 per month for each $1,000 of work.

This increase is based on term deposit interest rates, plus a small premium. That means the guidelines, established by the Ministry of Municipal Affairs and Regions but applied by the Regie, vary from year to year.

Regie spokesman Jean-Pierre Leblanc pointed out that, in some provinces, the cap is a strict limit, while in Quebec owners and tenants are free to agree on a larger increase, and many do. Fewer than one per cent of rental units are the object of a rent increase complaint by an existing tenant, he said.

Leblanc also noted that landlords often find room to manoeuvre when an apartment is vacated.

"Often when a tenant leaves, the rent is increased more than the limit," he said.

Only 321 complaints of excessive

increase were filed by new tenants in 2006-07, he pointed out. (New tenants can protest against an increase based on the previous tenant's rent.)

Property owners see the situation differently.

"It's completely ridiculous as a rate," said Hans Brouillette, spokesman for CORPIQ, or the Corporation des proprietaires immobiliers du Quebec, an owners group.

"Our stock of rental properties is aging; we have a lot of older buildings," Brouillette said. "We really need major renovations to improve it. Even tenants recognize that."

At 4.2 per cent, it can take more than 23 years to recoup $1,000 in major work, he said.

And while owners can sometimes get initial consent to a bigger hike, that agreement can break down.

"Often when the work begins, the relationship changes because of the inconvenience," he said.

CORPIQ's position is that the increase should at least reflect mortgage rates, plus a premium.

If an owner does renovate, redoing kitchens and bathrooms is the type of work that is most likely to catch the attention of prospective tenants, according to Brouillette. As a service to its members, CORPIQ maintains a list of recommended renovation contractors.

Other provinces enable owners to recoup money spent on major improvements or major repairs much more quickly, according to John Dickie, president of the Canadian Federation of Apartment Associations.

"Quebec is the cheapest by a factor of two to three times," Dickie said.

And some provinces have no rent control systems at all, he pointed out.

So what's an owner to do? Some confess to stretching the rules.

Jules Lavigueur, a daycare educator, owns two buildings in Ahuntsic. He likes to keep his properties in good shape, so he has worked out a system for recovering renovation costs.

"When a tenant moves and has been there for a long time, I renovate," he said. "Even if I leave it vacant for a few months, I wait to find someone to rent to who won't contest. I explain the old rent and say I did renovations. Then I say: 'Either you can take it like that, or not.' "

Some owners also admit to backdating leases or hanging on to them before remitting a copy to a new tenant. This results in the tenant missing the deadline to contest the rent.

Orfeo says that, so far, he's had success with a straightforward approach and hasn't had to defend an increase before the Regie.

He's convinced his calculated risk on real estate will secure his family's financial future and have him retiring early.

"It's the only investment you make where others contribute to your (retirement) fund," he said.

Almost Done!

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.